Reddy bullish on growth story Bhatt bears pick holes

MUMBAI: Central banks are usually viewed as conservative while the entities they regulate — banks — are more gung ho. But on Friday, there appeared to be a bit of a role reversal.

While RBI governor YV Reddy sounded fairly optimistic about the economy motoring on at over 8%, OP Bhatt, who heads the country's largest bank SBI, struck a cautious note. Bhatt wasn't too sure of how long the momentum in the economy could be maintained.

The content and substance of the speeches of RBI governor and SBI chief varied. While one looked outward, the other looked inward and ended up with exactly opposite conclusions. However, both Mr Reddy and Mr Bhatt showed concern for the bottom of the pyramid. Mr Reddy said further reforms should be inclusive while Bhatt said reforms have failed to reach rural India.

At a seminar on emerging challenges for the financial sector, the RBI governor sounded more optimistic than analysts and said the economy would grow 8.5% this fiscal. He did say that policy makers are usually more conservative than markets in their projections for the economy. What Reddy implied was that the central bank's growth projection for 2007-08 was far higher than the initial estimates of multilateral agencies and some local economic research institutions.

Listing the positives, Mr Reddy said the uniqueness of the current phase is that despite a sharp rise in global crude oil prices, the growth has continued. And much of the growth is funded by domestic savings and contributed by domestic factors. "We are in a phase of self-accelerating growth phenomenon. Around 98% of the investments was financed through domestic savings and most through domestic entrepreneurship."

He was also confident that India's current account deficit, which is currently at 1.1% of GDP, was manageable. The RBI chief also drew attention to other factors. Until a few years ago, he said, much of the talk centred around valuable foreign exchange reserves. Now the talk has veered around to the value of the rupee.

India's external sector, Mr Reddy said, was one of the strongest among the emerging markets. In any discussion on global imbalances, it is always the US and China that figure and not India, he said. Instead, it has contributed to global balances.

But Mr Bhatt wasn't convinced. The SBI chief said he was concerned over the sustainability of the high growth story. Especially so, when the benefits are yet to reach the rural poor. On the demographic dividend, he said there is paucity of talent in the country with firms facing high attrition. "India's dividend could end up in a disaster," he warned.

Mr Bhatt listed other concerns too, such as a slowdown in exports due to poor infrastructure and local food consumption. The per-capita foodgrain availability is now lower than that during the Bengal famine, he said. In the financial sector, he said, banks are in the business of pricing risks. However, banks' ability to identify and price risks is becoming inadequate.

Most banks do not understand technology and end up "being hostage to IT vendors" who, in turn, do not understand banking, he said.